The Variability of Inflation Rates Across Household Types

IT IS WELL KNOWN that the Consumer Price Index (CPI) measures the changing cost of the fixed market basket of an average consumer. It is an aggregate economic indicator of changes in retail prices and, in the process of averaging across individuals, subsumes the variability in consumption patterns inherent in a modetn economy. It is thus evident that the use of a single index in adjusting the incomes of broad groups of individuals has an automatic distributional impact. Individuals whose own price index rises more slowly than the index used to adjust their incomes experience a windfall benefit, while those whose price index rises more rapidly experience a relative loss. Such variability in actual price experience relative to the average measured change in prices is soon to be of great importance to taxpayers throughout the income distribution. The Economic Recovery Tax Act of 1981 calls for Adjustments in tax tables so that inflation will not result in tax increases, beginning not later than December 15, 1984 [12]. Public Law 97-34 calls for using the official Consumer Price Index for all Urban Con-